Glossary
Reverse DCF
M3.05Also called reverse discounted cash flow, expectations investing.
Running the model backwards. Instead of forecasting cash flows and producing a value, take the market price as given and solve for the growth the price requires.
A company valued at ₹12,000 crore generating ₹400 crore of free cash flow, at an 11.5% cost of capital, needs about 8.2% perpetual growth to justify its price on a simple perpetuity.
The change in stance is the whole benefit. A forward model asks you to predict, which nobody does well. A reverse model asks you to judge whether a stated expectation is plausible, which is a question a careful analyst can answer. It removes the temptation to reverse-engineer assumptions until the answer matches your prior, because there is no answer to match.
State the implied expectation in a sentence a domain expert could argue with. That sentence is the investment case.